You won’t be profitable at exit

Venture backed companies like Uber, WeWork, and Spotify, are unprofitable. Is this the norm or just a trend for the more recent vintage of high flying companies? To answer that question, we took a look at the operating income and free cash flow of 92 tech companies at the time they went public going as far back as 1996 (Amazon). The data shows that profitability at exit depends on the type of tech company you are.

Ecommerce on median generates a profit. The median operating income and free cash flow at the time of exit was $4.1mm. This makes sense: because ecommerce revenues are less predictable and not contracted recurring revenue, these businesses generally need to be profitable, especially on a transaction level.

SaaS is highly unprofitable. With median operating income and free cash flow of -$18mm and -$8mm, SaaS businesses can get away with unprofitability at the time of exit because their revenue is contracted and recurring. In fact, 43 out of the 52 companies listed were unprofitable and 33 out of the 52 didn’t generate positive free cash flow. Because investors love the recurring revenue model, so long as you’re growing cash efficiently, you can get away with unprofitability as a SaaS business.

Social media is a mixed bag. Facebook and Linkedin which are bellwether social media properties were profitable at the time of exit, while Twitter and Snapchat were not. Twitter and Snapchat had fantastic growth at the time of IPO though, hence they had successful IPO’s. Fast growth can overcome burn, within reason.

Marketplaces are unprofitable. Surprisingly marketplaces like Redfin and Groupon are unprofitable at the time of IPO. We define marketplaces as those businesses that are two sided, have two sets of customers, or don’t own the inventory they sell. Note however, on a free cash flow basis, they’re barely burning cash with a median of only -$646,000.

Content distributors light cash on fire. No one in the space was profitable at exit and at a median of -$30mm of operating loss, they are the highest burner of all the categories. Note only Spotify generated cash at the time it went public with free cash flow of $167mm. That’s part of the reason their IPO didn’t include the issuance of any new shares — they didn’t need the cash.

Hardware, like ecommerce has to be profitable. The hardware companies we looked at were profitable across the board and only one didn’t generate free cash flow. Again similar to ecommerce companies, they need to be profitable given the one time nature of the sale, especially for bigger ticket products.